Stocks Sparkle In July Newsletter: A Change In Attitude Will Push Up Prices

July 8, 1985|By Suzy Hagstrom of The Sentinel Staff

Investors should expect the stock market to display fireworks during the rest of July, according to Nicholson Report, a financial newsletter based in Coral Gables.

''We expect July to be a sparkler,'' writes Robert Nicholson, the newsletter's publisher. ''On average, July is a rather ho-hum month. In fact, it has been a modest loser in each of the past four years. But this year, we are looking for a month that will keep us all awake and smiling.''

People who are dissatisfied with other investments will be responsible for an increase in stock prices this month, according to Nicholson.

As their certificates of deposit with high returns expire, investors will not be satisfied with the current lower returns. Long-term CDs now carry interest rates of 8.5 and 9.25 percent, compared with 14 percent in 1981 and 1982.

Interest rates of money funds have dropped from 18 percent during the early 1980s to 7.5 percent currently, and could fall further, according to Nicholson. Because they have been a good investment recently, bonds are becoming overpriced. ''New investment in bonds is actually risky,'' Nicholson writes. ''They could soon top and tumble.''

Demand for stocks of large established companies, the ''blue chips,'' will exceed supply, Nicholson predicts. The price-to-earnings ratio for such stocks now is about 12, far below 20 in the early 1960s.

Price-to-earnings ratio is derived by dividing a stock's selling price per share by annual profit per share. A low ratio may indicate that a stock is underpriced while a high ratio may indicate that a stock is overpriced.

Nicholson predicts that individual investors will buy stocks. That will cause price-to-earnings ratios to rise and the Dow Jones industrial average, a measure of stock prices, to set new records.

Not all stocks will benefit, Nicholson warns. ''Oils, heavy industry and technology stocks are still out of favor. This means that investors must continue to be selective, or they could get hurt, even in a rising market.''

-- A SECOND OPINION. Market Logic, a newsletter based in Fort Lauderdale, advises investors to maintain their commitment to stocks because ''the outlook for the market remains bullish.''

''Business is just strong enough to allay fears of a sharp drop in corporate profits. Hence, the current moderate growth in the economy is conducive to further appreciation in stock prices.''

Market Logic warns that clouds loom on the horizon. The high volume of new stock offerings could exhaust the buying power of investors and create an over-abundance of stocks. ''Fortunately, most of the indicator evidence is bullish.''

Stock prices increase at far-above-average rates on the days before holidays and at above-average rates on the days after holidays, according to Market Logic.

The newsletter reaches that conclusion after having studied stock trading before and after New Year's, Presidents' Day, Good Friday, Memorial Day, the Fourth of July, Labor Day, Thanksgiving and Christmas.

''Our original study showed that nearly the entire market advance between 1927 and 1975 occurred solely in the days preceding market holiday closings . . . The rest of the world is now waking up.''

The Massachusetts Institute of Technology recently conducted a study that confirms Market Logic's findings, the newsletter reports. MIT's study shows that 38 percent of the stock market's total return from 1963 through 1982 occurred the eight days before holidays.

Investors may want to buy stock two days before holidays and sell stocks the day before holidays. Investors should not go out of their way to buy or sell stock the days before holidays, according to Market Logic.

The newsletter suggests such timing to investors who already have planned purchases and sales. ''On average, such a strategy will either make or save you a few dollars per trade.''